Michigan's Pension Crisis Means Tax Hikes and Cutting Cops

Michigan should transition all retirement and health care benefits for government employees to 401(k)-style benefits that are common in the private sector. That was the consensus of the West Michigan Policy Forum, which held its fifth conference in Grand Rapids on Monday.

“The status quo is unacceptable and unsustainable and we have a stewardship obligation to leave things better off in the future and you can’t do that unless you deal with these issues,” said David Walker, former comptroller general of the United States and former head of the U.S. Government Accountability Office.

Walker unveiled a study commissioned by the policy forum of employee retirement obligations of seven Michigan municipalities: Ann Arbor, Grand Rapids, Grand Traverse County, Kalamazoo, Lincoln Park, Port Huron and Saginaw.

The total unfunded liabilities for these seven municipalities came to $2.3 billion. All but Ann Arbor have taken steps to modify their defined benefit pension plans. Walker warned, though, that retiree health care costs are an even bigger problem, taking a larger and larger chunk of government revenue.

The Michigan Constitution places a limit on how much a municipality can collect in property taxes. That means a city with an unfunded liability must take other steps. These include raising other taxes or cutting services, typically infrastructure and public safety.

Municipalities can collect income tax, and three of the seven in the study now do so. If they close their defined benefit pension system to newly hired employees, they can also finance their unfunded retirement obligations by issuing bonds. But that path creates debt to pay off debt. All of the municipalities have more retirees than active workers.

“By the time an employee retires, you should have funded all of their benefits, because they’re not going to give you any more service,” said Walker. He blames politicians, not workers or retirees, for the underfunding.

“Typically, what happens in the public sector is they hold the line on cash pay; they promise the sun, moon and stars on retirement benefits; they don’t fund them and then we have this ticking time bomb,” said Walker.

Unlike the federal government, states and cities can't cover their obligations by printing money. And if their tax burden becomes too high, he added, taxpayers can move out of state.

“The status quo is unacceptable and unsustainable,” said Walker. “We have a stewardship obligation to leave things better off in the future and you can’t do that unless you deal with these issues.”

After the presentation, a panel of public and private executives discussed possible solutions. The participants included Tom Menzel, the county administrator of Grand Traverse County; James Freed, the Port Huron city manager; Nick Ciaramitaro, legislative director for Michigan AFSCME Council 25; John Kennedy, president and CEO of Autocam Medical; and Doug Roberts, former Michigan treasurer.

All agreed reform was needed. They discussed the merits of closing pension systems to new employees, formulating retiree health care benefits with exchanges under the Affordable Care Act and eliminating pension abuses such as pension spiking.